PolyaLesova

SAN FRANCISCO (MarketWatch) -- Oil futures fell almost 5% Tuesday with turbulence in the global financial markets and a move by key oil producers to lower their forecast for world oil demand for this year sending prices to their lowest closing level since February.

The decision late Tuesday by the U.S. Federal Reserve to leave its benchmark fed funds rate unchanged at 2.0% likely contributed to oil's weakness near the close of the trading session, as the U.S. dollar gained ground against most currency rivals. See Fed story.

But crude prices headed higher in electronic trading on Globex early Tuesday evening as the U.S. stock market recovered from steep declines on reports that the government might extend a loan to embattled insurer American International Group
AIG, +0.08%See Market Snapshot.

Crude oil for October delivery closed at $91.15 per barrel on the New York Mercantile Exchange, down $4.56, or 4.8%. The contract already dropped 5.4% on Monday.

October crude fell to a low of $90.51 per barrel Tuesday in electronic trading on Globex, oil's weakest intraday level since early February.

Prices were moving higher as of 3:30 p.m. EDT, trading at $93.

The Fed decision was bullish for the U.S. dollar, as well as anti-inflationary, so it 'could keep investment buying out of commodities.'
Darin Newsom, DTN

Other energy futures fell during the regular trading session. October natural-gas futures closed down 9.5 cents, or 1.3%, at $7.279 per million British thermal units.

It's "more of the same -- weak fundamentals and continued long-liquidation," said Darin Newsom, DTN senior analyst.

The Fed decision was bullish for the U.S. dollar, as well as anti-inflationary, so it "could keep investment buying out of commodities," said Newsom. See Currencies.

But this market could find support from commercial buying at any time, he said.

On Wall Street, U.S. stocks edged higher late Tuesday as the focus of the financial crisis shifted from Lehman Brothers Holdings Inc.
LEH
to American International Group and to the Fed's decision to stand pat on interest rates.

On Monday, oil prices joined the stampede downward in the financial markets as "investors shifted capital to anything with a degree of safety," said Simon Wardell, an oil analyst at Global Insight.

"With the outlook for the global economy deteriorating by the day, commodity investors are no longer confident that demand, even from emerging economies, will be enough to stem a looming surplus of oil in the market," he said in a note to clients.

On Monday, oil futures fell $5.47 to close at $95.71 a barrel on Nymex.

Demand cut

Meanwhile, "OPEC is now projecting decreased world demand due to economic problems."

World oil demand growth in 2008 has been revised down by 100,000 barrels a day and expected to grow by 900,000 barrels to average 86.8 million barrels a day, the Organization of the Petroleum Exporting Countries said in a monthly report issued Tuesday.

OPEC also expects world oil demand to grow by 900,000 barrels per day to an average of 87.7 million barrels per day in 2009. The forecast was unchanged from the previous report.

Taking a look at the bigger picture, "clearly right now it's a bearish market," said Mike Wittner, global head of oil research for Societe Generale in London. "You don't step in front of a speeding bus."

Wittner, however, said September is likely to represent the low for oil.

"I think part of what's going on is that there's seasonal weakness because of planned refinery maintenance. The runs start to go up before the winter, that means the refineries should start to pick up their buying," Wittner said.

He also said non-OECD demand is holding up and that supplies will be an issue. Wittner was referring to the Organization for Economic Co-operation and Development, a group of industrialized nations.

"Despite the mixed signals coming from the Saudis after the OPEC meeting, we're $10 a barrel lower than where we were," he said. "The Saudis will start cutting sooner or later, probably sooner than later."

On Sept. 9, OPEC members agreed to cut their production quota, but the size of the cut was a bit skewed because it excluded output from Iraq, as usual, but also Indonesia, which suspended its membership to the cartel. And the new target of 28.8 million barrels per day included new members Angola and Ecuador. See full story.

Following the meeting however, a Saudi official told the media that Saudi Arabia had no plans to change its oil policy.

Storm disruptions

"While the outlook for the global economy has undoubtedly deteriorated, the market is largely ignoring actual supply disruptions in the United States," said Global Insight's Wardell.

Hurricane Ike passed through the Gulf of Mexico and surrounding area over the weekend. As of Monday, nearly all of the oil production in the Gulf, and about 93.8% of natural-gas output remained shut-in, according to the U.S. Minerals Management Service.

Damage reports indicate that it may be days, if not weeks, before full supply is resumed, said Wardell. "As far as oil output is concerned, this is problematic, but not disastrous."

But "the disruption to 16 refineries in the region, with a combined capacity of over 4.2 million b/d, is causing problems," he said. And "With gasoline inventories already low thanks to very weak margins and minimal refinery throughputs, many states will suffer gasoline shortages."

"The outage will also have a lasting impact on the refined product sector through the coming six months, though the extent of that impact is hard to gauge at present," he said.

Valero Energy
VLO, +1.15%
said Tuesday that power has been restored to most production units at the Valero Houston Refinery and the Valero Texas City Refinery. Valero is working to restore power at its Port Arthur refinery. But all three refineries remain shut down.

Chevron Corp.
CVX, +0.13%
said Monday that there are indications that some platforms have been affected by Ike, with some toppled in the eastern and western shelf areas.

Against this backdrop, the average U.S. retail price for a gallon of regular gasoline climbed to $3.854 Tuesday, up from $3.842 Monday, and above the month-ago price of $3.751, according to AAA's Daily Fuel Gauge Report.

But prices for petroleum prices followed oil lower Tuesday on Nymex. October reformulated gasoline closed down 16.1 cents, or 6.3%, at $2.4008 a gallon and October heating oil dropped 7.2 cents to end at $2.7197 a gallon.

Data views

The U.S. Energy Department will release its weekly update on petroleum supplies Wednesday morning and an update on natural-gas supplies in storage on Thursday morning.

On average, industry analysts surveyed by Platts expect the Wednesday report to show that crude supplies fell by 3.7 million barrels for the week ended Sept. 12, distillates fell by 1.7 million and motor gasoline inventories fell by 3.6 million barrels.

"A combination of lower imports as the Louisiana Offshore Oil Platform and the Houston Ship Channel closed ahead of the arrival of Hurricane Ike, as well as oil production in the Gulf of Mexico that remained shut-in after Hurricane Gustav, will result in another week of sharp stock declines," said Linda Rafield, Platts senior oil analyst, in a note to clients.

Global Insight expects the Energy Department report on Thursday to show an increase of 50 billion cubic feet in natural-gas supplies in storage for last week.

Losses in the energy market Tuesday helped push a key index for commodities lower. The Reuters/Jefferies CRB Index
CRB, +0.53%
a benchmark gauging the prices of major commodities, fell by 2.1%.

Gold futures closed lower after finishing with a gain of nearly 3% on Monday. See Metals Stocks.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.